Devon Energy (NYSE:DVN) is a large United States focused energy company with a market capitalization of almost $40 billion. The company recently reported 2Q 2022 results with a blowout quarter, which included incredibly strong results. The company improved its asset position through investing and acreage-trading. As we'll see throughout this article, that'll enable the company to drastically increase shareholder returns.
Devon Energy is building up a unique and incredibly strong portfolio of assets.
The company's acreage resides in the top U.S. resource plays in the country. The company's acreage is focused on the Delaware Basin, which makes up roughly 75% of the company's production. The company recently made a strong acquisition of RIROCK, for $685 million, at a mere 2.2x cash flow valuation that closed recently.
The company has >10 years of low-risk development inventory, with strong resource upside. The company does have strong commodity price exposure, but it's focused on a low break-even to continue driving shareholder returns at a variety of price ranges.
Among the company's intelligent moves is its increased focus on acreage trading.
The company has continued to opportunistically "trade" acreage, an intelligent process in the industry that enables operators to better line up their acreage and their operations. The company's top acreage trade was the "Stateline Area trade" which consisted of 3000 acreage being traded lining up well with the company's legacy acreage in the region.
The trading doesn't cost the company anything, but its unlocked the company >200 new extended-reach drilling locations as the acreage has lined up. Longer laterals also lower the company's cost per barrel produced for its existing wells. That trading is something that most companies take advantage of, but something that Devon Energy has continued to do well.
The company has also made an intelligent acquisition in the Williston Basin.
The company's acquisition here expands its Williston Basin acreage from 85 thousand to 123 thousand. Growth here potentially makes other major plays such as Chord Energy an interesting acquisition proposition. The acquisition adds >100 highly economic drilling location and allows the company's inventory to expand enough to maintain production.
The company expects the pro forma combination will double the gross wells coming online in 2022e while increasing the oil mix to 70% from 67%. The acquisition price at 2.2x cash flow is an incredibly strong and well timed acquisition for investors.
The company generated incredibly strong results which will enable increased shareholder returns.
The company increased earnings by 38% YoY to $2.59 / share while EBITDAX increased to more than $10 billion annualized. Leverage dropped by a substantial 37% YoY to 0.4x. The FCF is more than $2 billion per quarter, up a massive 62% YoY. With the company's payout policy that has enabled more than 200% YoY dividend growth.
Devon Energy has the ability to drive massive shareholder returns at the current pricing environment.
The company has substantial FCF potential in an environment where WTI is almost $94 / share. The company's FCF yield is roughly 16% at the current time. The company has allocated ~75% to share buybacks, which means it's going to provide a shareholder yield of roughly 12%. The company's fixed + variable dividend yield is expected to be more than 8%.
The company has a $2 billion repurchase program underway as well. That's enough to buyback 5% of its outstanding shares and the average price has been well below the current share price. The company has the authorization through May 2023, but with $8 billion in FCF from 2022e we expect it to more than beat its guidance.
The company's current debt is ~$4.5 billion, something that it can comfortably afford, with just a few hundred $ million in annual interest payments. It can continue paying down debt, but it has no need to continue doing so.
The largest risk to the thesis, as per usual, is oil prices. The company is incredibly profitable at the current time and has the ability to drive substantial shareholder returns. However, that changes in different pricing environments. If prices were to drop significantly, which they have before, that'd hurt the company's ability to drive returns.
Devon Energy has a unique portfolio of assets and the company has been a 10-bagger since its COVID-19 related lows in March 2020. The company's dividend yield is more than 8%, counting the special variable dividends that have been added on. Despite the company's strong returns, it has the ability to continue generating additional returns.
The company has a $2 billion share buyback program underway, which is 6% by the end of year. At the same time, we expect the company to pay a high single digit dividend yield. It's done intelligent acreage trading and acquisitions to improve its portfolio. Putting all of this together, Devon Energy's strong financials makes it a valuable investment.
The Energy Forum helps you invest in energy, generating strong income and returns from a volatile sector. Our included Income Portfolio helps you invest in the broader market, finding high-yield non sector-specific opportunities.
Recommendations from a top 0.5% author on TipRanks!
Worldwide energy demand is growing and you can be a part of this profitable trend. Plenty of unique under the radar opportunities remain.
This article was written by
The Value Portfolio focuses on deep analysis of a variety of companies with a primary focus on the energy sector. Occasional articles also focus on building a retirement portfolio or on other sectors (such as healthcare or technology).
Legal Disclaimer (please read before subscribing to any services):
Any related contributions to Seeking Alpha, or elsewhere on the web, are to be construed as personal opinion only and do NOT constitute investment advice. An investor should always conduct personal due diligence before initiating a position. Provided articles and comments should NEVER be construed as official business recommendations. In efforts to keep full transparency, related positions will be disclosed at the end of each article to the maximum extent practicable. The majority of trades are reported live on Twitter, but this cannot be guaranteed due to technical constraints.
My premium service is a research and opinion subscription. No personalized investment advice will ever be given. I am not registered as an investment adviser, nor do I have any plans to pursue this path. No statements should be construed as anything but opinion, and the liability of all investment decisions reside with the individual. Investors should always do their own due diligence and fact check all research prior to making any investment decisions. Any direct engagements with readers should always be viewed as hypothetical examples or simple exchanges of opinion as nothing is ever classified as “advice” in any sense of the word.
Disclosure: I/we have a beneficial long position in the shares of DVN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.